On Wednesday, Google won a contentious battle against the French government and escaped having to cough up nearly 1.3 billion dollars in unpaid taxes.
At the core of the case was the claim that Google had avoided tax payments by utilizing a Dublin-based subsidiary to sell products and services to France.
As reported by Micah Maidenberg and Aurelien Breeden for the New York Times, “Google employs 700 people in France through its subsidiary there, but the company used a division based in Ireland to sell French customers digital services like its well-known advertising platform AdWords.”
The administrative court in charge of the Google tax case ultimately decided that the American technology giant didn’t owe a penny considering that France has no jurisdiction over the Irish company.
“The French company Google Ireland Limited (GIL) is not taxable in France for the 2005 to 2010 period,” it asserted.
According to Madeinberg and Breeden, the local court decided “the Irish unit did not have a “stable” presence in France, meaning that the French tax authorities could not collect corporate income and withholding taxes from it,” and that “other taxes, including a value-added tax, did not apply.”
In other words, as explained by The Irish Times, “the conditions to tax Google Ireland as if it had a permanent establishment in France were not met as Google France did not have the sufficient autonomy from the Irish headquarters.”
Gérald Darmanin, representing France’s tax authority, said the government plans on appealing this verdict, “given the important stakes in these cases, and, more broadly, the issue of fair taxation, in France, of profits derived from the digital economy.”
A Google spokesperson said this decision validates the fact that the American company “abides by French tax law and international standards” and is “committed to France and the growth of its digital economy.”
Google is still involved in a separate criminal case, which, according to Bloomberg’s Gaspard Sebag, looks “to verify whether Google’s Irish unit has a permanent establishment in France and whether the firm failed to declare part of its income in the country.”
Google’s Tax Power in Europe Under the Microscope
Overall, various analysts believe large multinational companies like Google, Apple and Starbucks will always have the upper hand when it comes to taxation and dealing with the European Union.
John Foley, writing for Reuters Breakingviews, a leading source of agenda-setting financial insight, says, “Governments remain at a disadvantage because big businesses like Google, Facebook and Amazon can think globally. Sacrificing a dollar in Ireland to save two in France makes perfect sense for them – and is what shareholders expect. The European Union, a collection of 28 member states, soon to be reduced to 27, finds that kind of thinking difficult. The idea that countries should retain full sovereignty over their tax rates has proven impossible to prise away. So long as that remains true, those that can put the bigger picture first will have the upper hand.”
As early as 2012, Tim Worstall, a Forbes contributor, expressed this same position of power held by large multinational companies operating in Europe.
Worstall wrote, “Google selling ads into France from its Irish office (which is what it does) is not some perversion of the tax system. It is not some dodge, some attempt to get away with it (as above, we might want to argue about what happens after that, but this stage isn't controversial at all), it is what the system was deliberately set up to encourage.”
“So M. Hollande and the French Government really are on something of a hiding to nothing here. It's not just that they don't have a right to tax Google Ireland's sales in France, the system specifically says that they cannot tax them,” he added.
However, Leonid Bershidsky, columnist for Bloomberg View, is not as sanguine about Google’s position in Europe and believes stipulations must be put in place to curtail its power and force the American tech giant to pay a fair share of taxes.
He says, “Google is a muscular, sometimes overly aggressive and destructive local player -- and yet, while no doubt of value to consumers, it contributes little in the way of tax revenue to the countries where it's active, far less than it does to its home country.”
Ultimately, Bershidsky believes this situation “cannot be fixed with fruitless legal action over back taxes or even with more constructive negotiation. Legislative action is needed to force multinationals such as Google to disclose revenue collected and profit made in each country -- and to pay tax on that profit as they generally do in the U.S.”
All in all, though, this decision on Google’s tax obligations in France should have important ramifications throughout the region.
“The ruling could turn out to be an extremely significant one. While a precedent set in one country does not directly apply to others, all European Union countries are supposed to abide by the same harmonized tax rules for companies doing business there. This means that courts in other European countries may view the ruling as having broader effect,” writes Ben Lovejoy for 9to5Google.
In a separate article for 9to5Google, Lovejoy goes on to explain how this decision might affect Apple’s work in Europe as well.
“Apple relies on essentially the same argument as Google, funnelling profits from sales made in Apple Stores throughout Europe to its European HQ in Ireland,” he says.
What are your thoughts on this historic decision and how will it affect the tax panorama in Europe?